Moody’s tips Greek default

Greece’s credit rating has been cut three steps by Moody’s Investors Service, which said the European Union’s rescue for the debt-laden nation would cause “substantial" losses for investors, amounting to a default.

Greece’s long-term foreign currency debt was downgraded to Ca, their second lowest rating, from Caa1, Moody’s said yesterday; it would re-assess the risk profile of any outstanding or new securities issued by the Greek government after the debt exchange that is part of the rescue plan has been completed.

“The combination of the announced EU program and the debt exchange proposals by major financial institutions imply that private creditors will experience substantial losses on their holding of Greek government bonds and this is something we need to reflect in the rating," Moody’s senior analyst Sarah Carlson said.

The financing package will consist of €109 billions ($144 billion) from the euro region nations and the International Monetary Fund. Financial institutions will contribute €50 billion through a series of bond exchanges and buybacks to cut Europe’s biggest-debt load.

The extra yield investors demand to hold Greek 10-year debt instead of German bunds snapped four days of narrowing and widened 9 basis points to 11.97 per cent. Shorter-term Greek debt gained yesterday, with the yield on the country’s two-year bond declining 23 basis points to 27.4 per cent. Under the EU’s second rescue program for Greece in 15 months, banks would voluntarily write down the value of their bonds by 21 per cent as part of the exchanges, the Institute of International Finance, which represents banks and insurers, said on Friday. BNP Paribas and Societe Generale, France’s largest banks by market value, were among financial firms supporting the EU’s second rescue of Greece, the IIF said.

The program implied that private investors would suffer in the debt exchange, “hence a default, on Greek government bonds is virtually 100 per cent", Moody’s said. The decision puts its rating closer to that of the other main credit companies.

Standard & Poor’s cut Greece to CCC, currently its lowest rating for any country, on June 13. Fitch Ratings also has Greece at CCC. Fitch said on Friday that it would lower Greece to “restricted default" when the debt exchange went ahead, before raising the rating once the swap was completed and the new bonds issued. Standard & Poor’s has indicated that it will cut Greece to “default" once the exchange goes ahead. Moody’s does not have a rating of “default".

Greek Finance Minister Evangelos Venizelos said the banking system was “one of the most guaranteed" in Europe after the new bailout agreement. He was in Washington yesterday for meetings with IMF managing director Christine Lagarde, US Treasury Secretary
Timothy Geithner
and Charles Dallara, managing director of the IIF.